OECD: Canadian growth solid, but don’t trip on the cracks

Despite a largely positive outlook for the Canadian economy — including a tip of the hat to late finance minister Jim Flaherty — the OECD raised concerns Wednesday about three familiar Canadian weaknesses: household debt, provincial finances, and the impact the commodity boom has had on manufacturing.

By and large, the message in the organization’s 2014 economic survey is positive: economic growth has been solid — expected to increase from 2.5 to 2.7 per cent in 2015 — and has outpaced most other OECD members “since the trough of the recession.”

Secretary-general Angel Gurría, in a special forward to the survey, attributed a lot of that good current economic standing to Flaherty’s response during and after the financial crisis.

“He was among the first to recognise the perils of rising public debt levels, and introduced a comprehensive programme of fiscal consolidation which left Canada’s public finances in a strong position,” he wrote.

Considering the emphasis on Flaherty, it’s also worth noting that the OECD sided with him in the last fight he picked with his own party on income splitting.

“This would be a disincentive to second earners (mainly married women) to work and benefit largely high-income families,” the OECD survey says.

Provincial problems

Despite the good news on the federal fiscal front, the survey puts a lot of emphasis on the unsustainability of certain provinces’ finances — mostly related to rising health-care costs and the impact high commodity prices and an appreciating Canadian dollar have had on the manufacturing sector.

“Higher oil prices have mostly benefitted residents of Alberta, Saskatchewan, and Newfoundland and Labrador, and other factors such as the emergence of low-cost competitors in emerging economies and exchange-rate appreciation resulted in slower growth in the manufacturing-based economies of Ontario and Québec,” the survey says.

Because global forces may widen inter-provincial disparities, they suggest reforming provincial transfer payments to factor in the effect demographic differences have on expenditures — perhaps basing the Canadian Health Transfer formula, for example, on health-care expenditures related to an ageing population.

As they recommended in their 2010 survey, they also propose reforms that include consolidating the provincial purchase of drugs and medical equipment, and creating provincial budget officers similar to the federal parliamentary budget officer.

On another controversial provincial-federal subject — increasing CPP pensions and contribution rates — they side with the Conservatives.

A CPP hike would increase labour costs for low-income workers, they say, making an increase to the means-tested Old Age Security pension a better option for addressing retirement income shortfalls.

Household debt

Though the OECD notes that housing prices are remarkably high in certain markets, it doesn’t see a broad correction on the horizon.

That said, they are worried about homeowners’ vulnerability to future interest rate hikes.

“Regardless of whether or not a housing price bubble exists, very high household debt levels represent a major vulnerability. Household debt began trending upwards in the mid-1980s from a level of 60% of disposable income to reach a record high of 166% by mid-2013,” they write.

One way to deal with that could be to impose a minimum interest rate floor on income tests to qualify for mortgages, thereby ensuring new homebuyers can make payments in a higher interest-rate environment.

But they’d also like to see the Canadian Mortgage and Housing Corporation gradually reduce its role in insuring mortgages, and consider privatizing its insurance arm in the long-run.

“The extent of federal government involvement in mortgage markets via mortgage insurance and CMHC securitisation operations is unusual by international standards. Some 65% of mortgages in Canada are insured, three-quarters of them by CMHC and the rest by private-sector insurers,” the survey says.

“This extensive role exposes the taxpayer to potentially large risks, although the track record has been good so far.”

More from iPolitics

2 comments on “OECD: Canadian growth solid, but don’t trip on the cracks”